Vodafone's counsel Mr Harish Salve told the Supreme Court on Thursday that in the absence of an explicit provision in the present Income Tax Act, the company could not be taxed on its $11-billion takeover of Hutchison's Indian telecom assets.

At present there is no specific provision in the country's tax legislation that allows such an overseas deal to be taxed in India.

Continuing his arguments for the second day, senior advocate Mr Salve told a bench headed by Chief Justice S. H. Kapadia that the I-Tax Department should not have conjured up an “artificial” interpretation of the I-T Act to demand $2.6-billion tax on the deal.

He said if at all the deal had to be taxed, Parliament should have amended the existing I-Tax Act before the Vodafone-Hutchison transaction to include an express provision to bring such a deal — that takes place abroad between two foreign companies — into the tax ambit citing the underlying economic interest in India.

But it cannot be left to the I-T Department to interpret the tax legislation to include all kinds of transactions citing nexus with India and look through the deal structure to claim tax demand, he said. “You (I-T Department) cannot cite nexus (with India) to create a charge where there is none,” he added.

However, the law can empower the I-T Department to look into whether companies are structuring deals to carry out tax evasion, round-tripping, money laundering or such illegal activities, he added.

He sought to make a distinction between tax evasion and tax avoidance, saying the latter is permissible under law. Mr Salve added that there was nothing illegal about the Vodafone-Hutch deal.

He said while the I-T Act covers the transfer of a capital asset situated in India for taxation, in the case of the Vodafone-Hutch deal, Vodafone acquired the capital asset of Hutch located overseas and even the deal was done outside India. Therefore, the deal was not liable to be taxed in India.

Mr Salve also said Vodafone cannot be taxed since it did not have the immediate right to receive income from Hutchison's Indian telecom assets.

Mr Salve said what foreign investors and companies need most is certainty of laws as they go strictly by what the law says. Since tax is a cost for all companies, if the law is clear about what can be taxed, then that can be accordingly factored into the valuation of companies, he said.

When it was pointed out to the court that some of the valuation in the deal was done according to the globally accepted accountancy norms — International Financial Reporting Standards — as the companies were listed overseas, the court said it had on an earlier occasion asked the accountancy regulator ICAI why India had not switched over to IFRS. Since India has a merger and acquisition market, many of the problems on valuation would have been solved had India shifted to IFRS, the court said.

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